Economics: The study of how society allocates scarce resources to satisfy
people’s unlimited wants
Scarcity: society has limited resources and therefor cannot produce all the
goods and services people want
Microeconomics: focus on the individual parts of the economy – how they
make decisions, households and firms
Macroeconomics: focus on society as a whole – looks at the economy as a
whole. –Inflation, unemployment etc.
Market economy: a market economy means a person gets to make their
decisions – not the government – (less government intervention).
It allocates resources through the decentralized decisions (uncontrolled
decisions) of firms and households.
Opposite is a command economy – all decisions are made by a central
authority (high government intervention – Cuba, China ▯some aspects,
Traditional economy – all the decisions rely heavily on customs, beliefs,
religion, tradition, etc.
Most economies are mixed. ▯Canada for example, has Toronto Hydro and
OLG, which are government, regulated (command) and also has a free
market system (all stores – market)
The goal of economics is to make the best decisions.
Economic rationality: making decisions that maximize the benefits the
decision maker receives.
Perfect information: everyone knows everything about everything.
e.g. all prices, cheapest way to produce, etc.
Asymmetrical information; not everyone has the same information. ▯Sellers
know more about their product than the buyers Resource: anything that can be used to make something else. E.g. the
classroom is a resource to be used to produce a lecture
Resources are factors of production.
The big 3 resources are land, labour and capital (physical, not portfolio) ▯
physical capital are stuff like buildings, lights etc. not money
Recently, we have been including entrepreneurship as a resource.
Making decisions requires trading off one goal against another.
Opportunity cost: of something is everything you have to give up to get it. ▯
it is the cost of the best forgone alternative.
e.g. you decide to attend Mac, the total explicit costs are $15000. Instead of
coming to mac, you could have lived at home for free and worked a full time
job that earned you $28000. You gave up the $28000 income – this is the
largest forgone alternative and implicit cost.
Therefor, the opportunity cost of coming to Mac is the forgone income
($28000) plus the $15000 spent on going to Mac. $43000 is the opportunity
Marginal changes: small, incremental changes to an existing plan of action. ▯
think in terms of what if… just one more?
People make decisions by comparing marginal benefits to marginal costs.
The “invisible hand”: coined by Adam Smith (father of economics)
▯guides buyers and sellers to each other to come to some agreed upon price
and to trade.
Efficiency: society makes the best use of its resources (economic decisions)
Equity: the fair distribution of resources (political decisions)
Positive versus normative statements
Positive statements: attempt to describe the world, as it is –descriptive
analysis Normative statements: are statements about how the world should be –
The circular flow diagram – Firms produce and sell goods and services, hire
and use factors of production. Households buy and consume goods and
services, own and sell factors of production.
Markets for goods and services – firms sell, households buy
Markets for factors of production – households sell, firms buy/hire
Factors of production – land, labour, capital ▯entrepreneurs